Investment Highlights

• We maintain our BUY recommendation and forecasts, but slightly increase our fair value to RM3.36/share (from RM3.29) to reflect the recent US$’s strength. Our FV is based on US$108 per clinker tonne (8.2mil clinker capacity x US$108 x RM4.12:US$1 minus RM833mil net debt), at a 10% discount to the replacement cost of US$120 to reflect the still changing cement sector outlook in Peninsular Malaysia. There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 2).

• Malayan Cement has proposed a private placement of new shares of up to 10% of its outstanding shares or 85mil shares at an indicative issue price of RM2.67/share. Based on our estimates, net proceeds of RM224mil will reduce Malayan Cement’s net debt and gearing of RM793.2mil and 0.35x as at 31 Dec 2020 to RM569.2mil and 0.25x. The exercise shall also resolve Malayan Cement’s outstanding share free float issue as it will increase the Malayan Cement’s public shareholding spread to 30.0% (from 23% currently).

• Given that Malayan Cement is still in its early stages of earnings recovery, our calculation shows that the exercise will not be EPS dilutive, but instead boost its FY21F EPS by 2%, as a 13% earnings enhancement arising from interest savings (based on an interest rate of 5%) more than offset a 10% expansion in the share base.

• Nonetheless, the exercise will be slightly FV dilutive (given that the indicative issue price is lower than our existing FV). Post the exercise, our FV shall fall marginally to RM3.29 based on the same asset-based valuation method.

• We maintain our cement per tonne ASP assumptions of RM260, RM270 and RM280 in FY21–23F. For sales volumes, we assume 4.2mil tonnes, 4.4mil tonnes and 4.5 tonnes respectively during the same period. While we believe the worst is behind the cement sector in Peninsular Malaysia (thanks largely to the sector consolidation), the recovery will be gradual given the still weak outlook for its two main consuming industries, i.e. property and construction.

• We now see more rational competition amongst players in the cement sector in Peninsular Malaysia and they are on the verge of a turnaround, followed with sustained profitability.

• At its current share price, the market is effectively valuing Malayan Cement at about 15% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120/tonne). We believe 10% is a more appropriate level.

Source: AmInvest Research - 16 Apr 2021